Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

Back in the day, Margaret Thatcher would say of the market economy that ‘there is no alternative’. She said it so often, in fact, that some of the so-called ‘wets’ in her cabinet took to calling her Tina.

The idea that the free marketeers had won the economic debate once and for all was popular in the 1980s and is now somewhat discredited as government intervention comes back into fashion. But the Tina concept is alive and kicking when it comes to asset allocation - one of the reason shares are so buoyant today is that investors really can’t think of a better place to put their cash.

Figures this week from data provider ETFGI show that inflows to exchange traded funds, a popular way to track global equity markets, have topped $1trn over the past year, the first time that this figure has been exceeded in a 12-month period.

The most recent quarter was the busiest on record with inflows of nearly $360bn as investors looked to put their money to work in a soaring stock market. The S&P 500 index in America has rallied by 80% since the market low in March 2020 to stand at more than 4,100.

One reason why stock markets are attracting unprecedented amounts of money is the dearth of viable alternatives. Bonds, which have been a popular asset in which to invest in the sluggish growth environment since the financial crisis, are suddenly out of favour as the recovery from the pandemic picks up pace.

The rise in bond yields since the start of the year represents the flip side of the stock market boom. Yields rise when bond prices fall and many investors are betting on the recent trend continuing for the foreseeable future.

The buoyancy of the stock market has raised fears that a bubble may be inflating, with older investors remembering the exuberance of markets during the technology boom of the late 1990s. That ended badly for investors when the bubble burst in 2000.

However, few investors think that we are there yet. A recent survey of professional investors by Bank of America showed just 7% of fund managers describing the market in terms of a bubble.

In part that reflects the fact that, while shares are much more highly valued than they were after the pandemic plunge last spring, equity markets are not yet excessively priced by historic standards. Investors may worry that the best of the stock market rally is over, but they also think that there is no real alternative. It’s Tina time again.

A key driver of markets at the moment is a change in leadership from the defensive growth shares that have led the charge for many years as investors have sought the safety of reliable earnings growth in an uncertain world. The shares of more cyclical companies, which thrive in a stronger economic environment, have instead come back into favour.

That is reflected in strong flows into value-focused ETFs and those holding smaller company shares, both parts of the market that are expected to perform better in today’s higher growth world.

It is ironic in some ways that ETFs, many of which seek only to passively track underlying market indices, should be attracting such interest now because, separately, evidence is emerging that actively-managed stock-picking funds are enjoying the best conditions in many years for their more selective approach.

The rotation from growth to value and the greater divergence between the performance of different corners of the stock market has led to the best quarterly performance for funds seeking to capture these differences by picking winners and avoiding losers.

Hedge funds have recorded their best quarterly gain on average since 2006, according to data group Eurekahedge, a rise of 4.8% in the past three months.

Some hedge funds have done much better than this average by placing well-timed bets on individual stocks that have recovered strongly during the recent value rally.

The moment after a strong rise in markets is almost by definition a point of increased market risk and investors are starting to look forward more anxiously, fearing the old market adage that it is sometimes better to travel than to arrive.

In particular focus will be the current crop of first quarterly earnings reports, which started this week with the big US banks and will unfold in the weeks to come.

This is a good moment to stand back and look at the market outlook, which fortunately is what we have just done with the publication of our latest quarterly Investment Outlook.

Every three months this report analyses the outlook for the market’s main asset classes and geographical regions. This time there is also a focus on the fund picks which we have proposed each December for several years now.

As usual, we have also recorded a webcast and podcast in which we tackle questions from Fidelity investors about the markets. Perhaps unsurprisingly we received plenty of interesting questions this time, with a clear focus on the recent rise in bond yields and concerns expressed about the return of inflation.

Catch up on the latest MoneyTalk Radio podcast, featuring extra questions that we didn’t have time to cover in the webcast. Or read the report or download a printable version here.

Five year performance

As at 31 March
2016-2017 2017-2018 2018-2019 2019-2020 2020-2021
S&P 500 17.2 14.0 9.5 -7.0 56.4

Past performance is not a reliable indicator of future returns

Source: Refinitiv as at 31.3.21. Total returns with net income reinvested in USD.

Important information

Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to a Fidelity adviser or an authorised financial adviser of your choice.

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